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24-1
CHAPTER 24
Budgetary Control and Responsibility Accounting
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives QuestionsBrief
Exercises ExercisesA
ProblemsB
Problems
1. Describe the concept ofbudgetary control.
1, 2 1
2. Evaluate the usefulnessof static budget reports.
3, 4, 5 1, 2 1, 2, 8 3A 3B
3. Explain the developmentof flexible budgets andthe usefulness of flexiblebudget reports.
6, 7, 8, 9,10, 11, 12
3, 4, 5 1, 3, 4, 5,6, 7, 8, 9,10
1A, 2A, 3A 1B, 2B, 3B
4. Describe the concept ofresponsibility accounting.
13, 14, 15, 16,17, 18, 24
11 6A
5. Indicate the features ofresponsibility reportsfor cost centers.
19 6 7, 9, 12
6. Identify the content ofresponsibility reportsfor profit centers.
20, 21 7 13, 14 4A 4B
7. Explain the basis andformula used in evaluatingperformance ininvestment centers.
22, 23, 24 8, 9, 10 14, 15, 16,17
5A 5B
24-2
ASSIGNMENT CHARACTERISTICS TABLE
ProblemNumber Description
DifficultyLevel
TimeAllotted (min.)
1A Prepare flexible budget and budget report for manufacturingoverhead.
Simple 20–30
2A Prepare flexible budget, budget report, and graph formanufacturing overhead.
Moderate 30–40
3A State total budgeted cost formula, and prepare flexiblebudget reports for two time periods.
Simple 20–30
4A Prepare responsibility report for a profit center. Moderate 20–30
5A Prepare responsibility report for an investment center,and compute ROI.
Moderate 40–50
6A Prepare reports for cost centers under responsibilityaccounting, and comment on performance of managers.
Moderate 40–50
1B Prepare flexible budget and budget report for manufacturingoverhead.
Simple 20–30
2B Prepare flexible budget, budget report, and graph formanufacturing overhead.
Moderate 30–40
3B State total budgeted cost formula, and prepare flexiblebudget reports for two time periods.
Simple 20–30
4B Prepare responsibility report for a profit center. Moderate 20–30
5B Prepare responsibility report for an investment center,and compute ROI.
Moderate 40–50
BLOOM’S TAXONOMY TABLE
24-3
Co
rrel
atio
n C
har
t b
etw
een
Blo
om
’s T
axo
no
my,
Stu
dy
Ob
ject
ives
an
d E
nd
-of-
Ch
apte
r E
xerc
ises
an
d P
rob
lem
s
Stu
dy
Ob
ject
ive
Kn
ow
led
ge
Co
mp
reh
ensi
on
Ap
plic
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nA
nal
ysis
Syn
thes
isE
valu
atio
n
1.D
escr
ibe
the
con
cep
to
f b
ud
get
ary
con
tro
l.E
24-1
Q24
-1Q
24-2
2.E
valu
ate
the
use
fuln
ess
of
stat
ic b
ud
get
rep
ort
s.E
24-1
Q24
-3Q
24-4
Q24
-5B
E24
-1B
E24
-2E
24-2
P24
-3A
P24
-3B
E24
-8
3.E
xpla
in t
he
dev
elo
pm
ent
of
flex
ible
bu
dg
ets
and
the
use
fuln
ess
of
flex
ible
bu
dg
et r
epo
rts.
Q24
-9Q
24-1
2E
24-1
Q24
-6Q
24-7
Q24
-8Q
24-1
0
Q24
-11
BE
24-4
E24
-3E
24-5
E24
-7E
24-9
E24
-10
BE
24-5
E24
-4E
24-6
P24
-1A
P24
-3A
P24
-1B
P24
-3B
BE
24-3
E24
-8P
24-2
AP
24-2
B
4.D
escr
ibe
the
con
cep
t o
fre
spo
nsi
bili
ty a
cco
un
tin
g.
Q24
-13
Q24
-14
Q24
-15
Q24
-16
Q24
-17
Q24
-18
Q24
-24
E24
-11
P24
-6A
5.In
dic
ate
the
feat
ure
s o
fre
spo
nsi
bili
ty r
epo
rts
for
cost
cen
ters
.
Q24
-19
BE
24-6
E24
-7E
24-9
E24
-12
6.Id
enti
fy t
he
con
ten
t o
fre
spo
nsi
bili
ty r
epo
rts
for
pro
fit
cen
ters
.
Q24
-20
Q24
-21
BE
24-7
E24
-14
E24
-13
P24
-4A
P24
-4B
7.E
xpla
in t
he
bas
is a
nd
form
ula
use
d in
eva
luat
ing
per
form
ance
in in
vest
men
tce
nte
rs.
Q24
-22
Q24
-23
Q24
-24
BE
24-8
BE
24-9
BE
24-1
0E
24-1
4
E24
-15
E24
-16
E24
-17
E24
-17
P24
-5A
P24
-5B
Bro
aden
ing
Yo
ur
Per
spec
tive
Exp
lori
ng
th
e W
ebR
eal-
Wo
rld
Fo
cus
Eth
ics
Cas
eC
om
mu
nic
atio
n
Co
mm
un
icat
ion
Man
ag. A
nal
ysis
Dec
isio
n M
akin
g A
cro
ss t
he
Org
aniz
atio
n
All
Ab
ou
t Y
ou
Dec
isio
n M
akin
g A
cro
ss t
he
Org
aniz
atio
nE
thic
s C
ase
Man
ag. A
nal
ysis
Rea
l-W
orl
d F
ocu
s
24-4
ANSWERS TO QUESTIONS
1. (a) Budgetary control is the use of budgets in controlling operations.(b) The steps in budgetary control are:
(1) Develop the planned objectives (budget).(2) Analyze differences between actual and budgeted results.(3) Take corrective action.(4) Modify future plans, if necessary.
2. Purpose Name of Report Frequency Primary Recipient(s)
(a)(b)(c)
ScrapDepartmental overhead costsIncome statement
DailyMonthlyMonthly and Quarterly
Production managerDepartment managerTop management
3. The budget report for the second quarter can include year-to-date information as well as data forthe second quarter.
4. There is no justification for Joe’s concern. The sales budget is derived from the sales forecastand it represents management’s best estimate of sales. Thus, it is a useful basis for evaluatingsales performance.
5. A static budget is an appropriate basis for evaluating a manager’s effectiveness in controllingcosts when:(1) The actual level of activity closely approximates the master budget activity level and/or(2) The behavior of the costs in response to changes in activity is fixed.
6. Yes, this is true. A flexible budget is a series of static budgets at different levels of activity.
7. The performance is unfavorable. The budgeted indirect labor cost in the static budget is $1.35per direct labor hour ($54,000 ÷ 40,000). At 45,000 direct labor hours, budgeted costs are$60,750 (45,000 X $1.35). Thus, indirect labor is $4,250 over budget ($65,000 – $60,750).
8. The performance is favorable. Factory insurance is a fixed cost. At 50,000 direct labor hours, thebudgeted cost is still $6,500. Thus, factory insurance is $300 under budget ($6,500 – $6,200).
9. The steps in preparing a flexible budget are:(1) Identify the activity index and the relevant range of activity.(2) Identify the variable costs and determine the budgeted variable cost per unit of activity for
each cost.(3) Identify the fixed costs and determine the budgeted amount for each cost.(4) Prepare the budget for selected increments of activity within the relevant range.
10. Alou Company can say that total budgeted costs are $25,000 fixed plus $6 per direct labor hour[($85,000 – $25,000) ÷ 10,000].
11. (a) At 9,000 hours, total budgeted costs are $76,000, or [$40,000 + ($4 X 9,000)].(b) At 12,345 hours, total budgeted costs are $89,380, or [$40,000 + ($4 X 12,345)].
24-5
Questions Chapter 24 (Continued)
12. Management by exception means that top management’s review of a budget report is focusedeither entirely or primarily on differences between actual results and planned objectives. The criteriafor identifying exceptions are materiality and controllability of the item.
13. Responsibility accounting is a method of controlling operations that involves accumulating andreporting costs (and revenues, where relevant) on the basis of the manager who has the authorityto make the day-to-day decisions about the items. The purpose of responsibility accounting is toevaluate a manager’s performance on the basis of matters directly under that manager’s control.
14. Ann should know that the following conditions contribute to the effective use of responsibilityaccounting:(1) Costs and revenues can be directly associated with the specific level of management
responsibility.(2) The costs and revenues are controllable at the level of responsibility with which they are associated.(3) Budget data can be developed for evaluating the manager’s effectiveness in controlling the
costs and revenues.
15. A cost is controllable at a given level of managerial responsibility if the manager has the power toincur the cost within a given period of time. Most costs incurred directly are controllable, whereas costsincurred indirectly and allocated to a responsibility level are noncontrollable at that level.
16. Responsibility reports differ from budget reports in two respects: (1) a distinction is made betweencontrollable and noncontrollable items and (2) performance reports either emphasize, or only include,items controllable by the individual manager.
17. Usually there is a relationship between a responsibility reporting system and a company’s organizationchart. In a responsibility reporting system, reports are prepared for each level of responsibility inthe organization chart.
18. There are three types of responsibility centers:(a) A cost center incurs costs (and expenses) but does not generate revenues.(b) A profit center incurs costs (and expenses) and also generates revenues.(c) An investment center incurs costs (and expenses), generates revenues, and controls the investment
funds available for use.
19. (a) Only controllable costs are included in a performance report for a cost center.(b) Variable and fixed costs are not identified in the report.
20. Direct fixed costs relate specifically to one center and are incurred for the sole benefit of thatcenter. An indirect fixed cost relates to the company’s overall activities and is incurred for thebenefit of more than one profit center. Both types of fixed costs are controllable. A direct fixedcost is controllable by a specific center manager and an indirect fixed cost is controllable by anofficer higher up in the organization.
21. Controllable margin is contribution margin less controllable fixed costs in a profit center. The purposeof controllable margin is to provide a basis for evaluating the manager’s effectiveness in controllingrevenues and costs.
24-6
Questions Chapter 24 (Continued)
22. The primary basis for evaluating the performance of the manager of an investment center isreturn on investment (ROI). The formula is: Controllable Margin divided by Average Operating Assets.
23. ROI can be improved by: (1) increasing controllable margin and (2) reducing average operatingassets. Controllable margin can be increased by increasing sales or by reducing variable andcontrollable fixed costs.
24. (a) The manager being evaluated should have direct input into the process of establishing budgetgoals and have the opportunity to respond to the evaluation. (b) Top management should makethe evaluation entirely on matters controllable by the manager, and should fully support theevaluation process.
24-7
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 24-1
VOORHEES COMPANYSales Budget Report
For the Quarter Ended March 31, 2008 Product Line Budget Actual Difference
Garden-Tools $310,000 $304,000 $6,000 U
BRIEF EXERCISE 24-2
VOORHEES COMPANYSales Budget Report
For the Quarter Ended June 30, 2008
Second Quarter Year to DateProduct Line Budget Actual Difference Budget Actual Difference
Garden-Tools $380,000 $383,000 $3,000 F $690,000 $687,000 $3,000 U
BRIEF EXERCISE 24-3
(a) MUSSATTO COMPANYStatic Direct Labor Budget Report
For the Month Ended January 31, 2008
Budget Actual Difference
Direct Labor $200,000 (10,000 X $20) $203,000 $3,000 U
(b) MUSSATTO COMPANYFlexible Direct Labor Budget Report
For the Month Ended January 31, 2008
Budget Actual Difference
Direct Labor $208,000 (10,400 X $20) $203,000 $5,000 F
24-8
BRIEF EXERCISE 24-3 (Continued)
The static budget does not provide a proper basis for evaluating performancebecause the budget is not based on the hours actually worked. In contrast,the flexible budget provides the proper basis for evaluating performancebecause the budget is based on the hours actually worked.
III A $300,000 ($2,000,000 X .15) increase in sales will increase contributionmargin and controllable margin $225,000 ($300,000 X 75%). The newROI is 28.5% ($1,425,000 ÷ $5,000,000).
III A decrease in costs results in a corresponding increase in controllablemargin. The new ROI is 27.5% ($2,200,000 ÷ $8,000,000).
III A decrease in average operating assets reduces the denominator. Thenew ROI is 33.3% ($3,200,000 ÷ $9,600,000).
24-12
SOLUTIONS TO EXERCISES
EXERCISE 24-1
1. True. 2. False. Budget reports are prepared as frequently as needed. 3. True. 4. True. 5. False. Budgetary control works best when a company has a formalized
reporting system. 6. False. The primary recipients of the sales report are the sales manager
and top management. 7. True. 8. True. 9. False. Top management’s reaction to unfavorable differences is often
influenced by the materiality of the difference.10. True.
EXERCISE 24-2
(a) PARGO COMPANYSelling Expense Report
For March By Month Year-to-Date
Month Budget Actual Difference Budget Actual Difference
January $30,000 $31,000 $1,000 U $ 30,000 $ 31,000 $1,000 UFebruary $35,000 $34,500 $ 500 F $ 65,000 $ 65,500 $ 500 UMarch $40,000 $47,000 $7,000 U $105,000 $112,500 $7,500 U
(b) The purpose of the Selling Expense Report is to help managementcontrol selling expenses. The primary recipient is the sales manager.
(c) Most likely, when management scrutinized the results for January andFebruary, they would determine that the difference was insignificant(3.3% in January and 1.4% in February), and require no action. Whenthe March results are examined, however, the fact that the differenceis 17.5% of budget would probably cause management to investigatefurther. As a result of their investigation, management would eithertake corrective action or modify the amounts of budgeted selling expensefor future months to reflect changing conditions.
(c) In case (a) the performance for the month was satisfactory. In case(b) management may need to determine the causes of the unfavorabledifferences for indirect labor and indirect materials, or since the differencesare small, 2.4% of budgeted cost for indirect labor and 1.2% for indirectmaterials, they might be considered immaterial.
(c) Flexible budgets are essential in evaluating a manager’s performancein controlling variable expenses because the budget allowance variesdirectly with changes in the activity index. At $170,000 of sales, themanager was over budget (unfavorable) by $1,000 but at $180,000 ofsales, the manager was under budget (favorable) by $400.
Total controllable fixed costs 14,600 14,200 400 FControllable margin $ 3,200 $ 3,900 $ 700 F
(b)
MEMO
TO: Paul Pronto
FROM: Student
SUBJECT: The Reporting Principles of Performance Reports
When evaluating the performance of a company’s segments, the performancereports should:
1. Contain only data that are controllable by the segment’s manager.2. Provide accurate and reliable budget data to measure performance.3. Highlight significant differences between actual results and budget
goals.4. Be tailor-made for the intended evaluation.5. Be prepared at reasonable intervals.
I hope these suggested guidelines will be helpful in establishing the performancereporting system to be used by Pronto Plumbing Company.
24-20
EXERCISE 24-10
(a) Fabricating Department = $40,000 fixed costs plus total variable costsof $2.20 per direct labor hour [($150,000 –$40,000) ÷ 50,000].
Assembling Department = $30,000 fixed costs plus total variable costsof $1.60 per direct labor hour [($110,000 –$30,000) ÷ 50,000].
(b) Fabricating Department = $40,000 + ($2.20 X 53,000) = $156,600.Assembling Department = $30,000 + ($1.60 X 47,000) = $105,200.
(c) $300 Total Budgeted Cost Line
250
200
150
Budgeted Variable Costs
100
50
40
Co
sts
in (
000)
Budgeted Fixed Costs
0 10 20 30 40 50 60 70 80 90 100
Direct Labor Hours in (000)
24-21
EXERCISE 24-11
(a) To Dallas Department Manager—Finishing Month: July
Controllable Costs: Budget Actual Fav/UnfavDirect MaterialsDirect LaborManufacturing Overhead
Total
$ 45,000 82,000 49,200$176,200
$ 41,500 83,000 51,000$175,500
$3,500 F 1,000 U 1,800 U$ 700 F
(b) To Assembly Plant Manager—Dallas Month: July
Controllable Costs: Budget Actual Fav/UnfavDallas OfficeDepartments:
MachiningFinishing
Total
$ 92,000
216,000 176,200$484,200
$ 95,000
220,000 175,500$490,500
$3,000 U
4,000 U 700 F$6,300 U
(c) To Vice President—Production Month: July
Controllable Costs: Budget Actual Fav/UnfavV P ProductionAssembly plants:
AtlantaDallasTucson
Total
$ 130,000
421,000 484,200 496,500$1,531,700
$ 132,000
424,000 490,500 494,000$1,540,500
$2,000 U
3,000 U 6,300 U 2,500 F$8,800 U
24-22
EXERCISE 24-12
(a) CREDE COMPANYMixing Department
Responsibility ReportFor the Month Ended January 31, 2008
(b) Most likely, when management examined the responsibility report forJanuary, they would determine that the difference was insignificantfor indirect labor (1.7% of budget), lubricants (2.9%), and maintenance(0%) and require no action. However, the differences for indirect materials(36%), and utilities (30%) would cause management to investigate further.As a result of their investigation, management would either take correc-tive action or modify the budgeted amounts for future months to reflectchanging conditions.
Total controllable fixed costs 15,500 16,000 500 UControllable margin $ 9,600 $10,000 $ 400 F
Return on investment* 12.0% 12.5% 0.5% F
*Average investment = ($82,400 + $77,600) ÷ 2 = $80,000 Budget ROI = $9,600 ÷ $80,000 Actual ROI = $10,000 ÷ $80,000 ROI Difference = $400 ÷ $80,000
24-25
EXERCISE 24-16 (Continued)
(b)
MEMO
TO: Drs. Martin Medina and Olga Ortiz
FROM: Student
SUBJECT: Deficiencies in the Current Responsibility Reporting System
The current reporting system has the following deficiencies:
1. It does not clearly show both budgeted goals and actual performance.2. It does not indicate the contribution margin generated by the center,
showing the amount available to go towards covering controllablefixed costs.
3. It does not report only those costs controllable by the manager ofthe center. Instead, it includes both controllable and common fixedcosts. This results in the center appearing to be unprofitable.
4. It does not indicate the return on investment earned by the center.
All of these deficiencies have been addressed in the recommended responsibilityreport attached. As can be seen from that report, the Preventative Servicescenter is profitable. The service revenues generated in this center are adequateto cover all of its costs, both variable and controllable fixed costs, and con-tribute toward the covering of the clinic’s common fixed costs. In addition, thereport indicates the return on investment earned by the center and that itexceeds the budget goal.
24-26
EXERCISE 24-17
Planes:
ROI = Controllable margin ÷ Average operating assets12%= Controllable margin ÷ $25,000,000Controllable margin = $25,000,000 X 12%
(c) The overall performance of management was slightly unfavorable.However, none of the unfavorable differences exceeded 10% of budgetexcept for lubricants (21%).
Direct materials ($.80 X 58,000)Direct labor ($.90 X 58,000)Indirect materials ($.40 X 58,000)Indirect labor ($.30 X 58,000)Utilities ($.25 X 58,000)Maintenance ($.15 X 58,000)
*Note that the per unit variable costs are computed by taking thebudget amount at 60,000 units and dividing it by 60,000. For example,
direct materials per unit is therefore $0.80 or $ ,
,48 00060 000
.
This report provides a better basis for evaluating performance becausethe budget is based on the level of activity actually achieved. Themanager should be criticized because every variable cost was overbudget except for direct labor.
Direct materials (.80 X 64,000)Direct labor ($.90 X 64,000)Indirect materials ($.40 X 64,000)Indirect labor ($.30 X 64,000)Utilities ($.25 X 64,000)Maintenance ($.15 X 64,000)
The manager’s performance was slightly better in September than itwas in August. However, each variable cost was slightly over budgetagain except for direct labor.
Note that actual variable costs in September were 10% higher thanthe actual variable costs in August. Therefore to find the actual vari-able costs in September, the actual variable costs in August must beincreased 10% as follows:
August(actual)
September(actual)
Direct materialsDirect laborIndirect materialsIndirect laborUtilitiesMaintenance
$ 47,000 X 110% 51,300 X 110% 24,200 X 110% 17,500 X 110% 14,900 X 110% 9,200 X 110%$164,100 X 80%
Variable costsCost of goods soldSelling and administrative
Total
Contribution margin
Controllable fixed costsCost of goods soldSelling and administrative
Total
Controllable margin
$2,500,000
1,300,000 220,000 1,520,000
980,000
200,000 50,000 250,000
$ 730,000
$2,560,000
1,259,000 227,000 1,486,000
1,074,000
206,000 52,000 258,000
$ 816,000
$60,000 F
41,000 F 7,000 U 34,000 F
94,000 F
6,000 U 2,000 U 8,000 U
$86,000 F
(b) The manager effectively controlled revenues and costs. Contributionmargin was $94,000 favorable and controllable margin was $86,000favorable. Contribution margin was favorable primarily because saleswere $60,000 over budget and variable cost of goods sold was $41,000under budget. Apparently, the manager was able to control variablecost of goods sold when sales exceeded budget expectations. Themanager was ineffective in controlling fixed costs. However, the un-favorable difference of $8,000 was only 9% of the favorable differencein contribution margin.
(c) Two costs are excluded from the report: (1) noncontrollable fixed costsand (2) indirect fixed costs. The reason is that neither cost is control-lable by the Patio Furniture Division Manager.
24-36
PROBLEM 24-5A
(a) DINKLE MANUFACTURING COMPANYHome Division
Responsibility ReportFor the Year Ended December 31, 2008
(in thousands of dollars)
Difference
Budget ActualFavorable F
Unfavorable U
SalesVariable costs
Cost of goods soldSelling and administrativeTotal
Contribution marginControllable direct fixed costs
Cost of goods soldSelling and administrative
TotalControllable margin
ROI
$1,400
640 100 740 660
170 80 250$ 410
16.4%(1)
$1,500
700 125 825 675
170 80 250$ 425
17%(2)
$100 F
60 U 25 U 85 U 15 F
0 U 0 U 0 U$ 15 F
.6% F (3)
(1) $410
$2,500
(2) $425$2,500
(3) $15
$2,500
(b) The performance of the manager of the Home Division was slightlyabove budget expectations for the year. The item that top manage-ment would likely investigate is the reason why variable cost ofgoods sold is $60,000 unfavorable. In making the inquiry, it shouldbe recognized that the budget amount should be adjusted for the
increased sales as follows: $1,500,000 X $640
$1,400
= $685,714. Thus,
there should be an explanation of a $14,286 unfavorable difference.
24-37
PROBLEM 24-5A (Continued)
(c) (1)$425,000 + ($700,000 X 6%)
$2,500,000 = 18.7%.
(2)$425,000
$2,500,000 – ($2,500,000 X 10%) = 18.9%.
(3)$425,000 + $90,000
$2,500,000 = 20.6%.
24-38
PROBLEM 24-6A
(a) No. 1To Cutting Department Manager—Seattle Division Month: JanuaryControllable Costs: Budget Actual Fav/UnfavIndirect laborIndirect materialsMaintenanceUtilitiesSupervision
Total
$ 70,000 46,000 18,000 17,000 20,000$171,000
$ 73,000 47,700 20,500 20,100 22,000$183,300
$ 3,000 U 1,700 U 2,500 U 3,100 U 2,000 U$12,300 U
No. 2To Division Production Manager—Seattle Month: JanuaryControllable Costs: Budget Actual Fav/UnfavSeattle DivisionDepartments:
CuttingShapingFinishing
Total
$ 51,000
171,000 148,000 206,000$576,000
$ 52,500
183,300 158,000 210,000$603,800
$ 1,500 U
12,300 U 10,000 U 4,000 U$27,800 U
No. 3To Vice President—Production Month: JanuaryControllable Costs: Budget Actual Fav/UnfavV-P Production Divisions:
SeattleDenverSan Diego
Total
$ 64,000
576,000 673,000 715,000$2,028,000
$ 65,000
603,800 676,000 722,000$2,066,800
$ 1,000 U
27,800 U 3,000 U 7,000 U$38,800 U
24-39
PROBLEM 24-6A (Continued)
No. 4To President Month: JanuaryControllable Costs: Budget Actual Fav/UnfavPresidentVice-Presidents:
ProductionMarketingFinance
Total
$ 74,200
2,028,000 130,000 105,000$2,337,200
$ 76,400
2,066,800 133,600 109,000$2,385,800
$ 2,200 U
38,800 U 3,600 U 4,000 U$48,600 U
(b) (1) Within the Seattle division the rankings of the department man-agers were: (1) Finishing, (2) Shaping, and (3) Cutting. If the rank-ings were done on a percentage basis, they would rank as follows:(1) Finishing – 2.0 U (2) Shaping – 6.8 U and (3) Cutting – 7.2 U.
(2) At the division manager level, the rankings were: (1) Denver,(2) San Diego, and (3) Seattle.
(3) Rankings in terms of dollars may be somewhat misleading in thiscase because of the substantial difference between the productionbudget and the other budgets. On a percentage basis the differ-ences and rankings are: (1) production, 1.9%; (2) marketing, 2.8%;and (3) finance, 3.8%.
(c) Based on the above budget report, control over costs was effective.For variable costs, all differences were favorable. For fixed costs, therewere no differences between budgeted and actual costs.
(d) The formula is fixed costs of $27,500 plus total variable costs of$2.40 per direct labor hour.
24-44
PROBLEM 24-2B (Continued)
(e) $100
90
TotalBudgetedCost Line
80
70
60
BudgetedVariableCosts
50
40
30
20BudgetedFixed Costs
10
Ove
rhea
d C
ost
s in
(00
0)
0 5 10 15 20 25 30
Direct Labor Hours in (000)
24-45
PROBLEM 24-3B
(a) The formula is fixed costs $20,000 plus total variable costs of $2.70 perunit ($135,000 ÷ 50,000 units).
(b) HARDESTY COMPANYPackaging Department
Budget Report (Flexible)For the Month Ended May 31, 2008
Difference
UnitsVariable costs*
Direct materials ($.90 X 55,000)Direct labor ($1.00 X 55,000)Indirect materials ($.30 X 55,000)Indirect labor ($.25 X 55,000)Utilities ($.15 X 55,000)Maintenance ($.10 X 55,000)
Total variablecosts ($2.70 X 55,000)
Fixed costsRentSupervisionDepreciation
Total fixed costsTotal costs
Budget at55,000 Units
$ 49,500 55,000 16,500 13,750 8,250 5,500
148,500
8,000 7,000 5,000 20,000$168,500
Actual Costs55,000 Units
$ 47,000 53,000 15,200 13,000 7,100 5,200
140,500
8,000 7,000 5,000 20,000$160,500
Favorable FUnfavorable U
$2,500 F 2,000 F 1,300 F 750 F 1,150 F 300 F
8,000 F
0 F 0 F 0 F 0 F$8,000 F
*Note that the per unit variable costs are computed by taking the budgetamount at 50,000 units and dividing it by 50,000. For example, direct
materials per unit is $0.90 or $45,00050,000
.
This report provides a better basis for evaluating performance becausethe budget is based on the level of activity actually achieved.
24-46
PROBLEM 24-3B (Continued)
(c) HARDESTY COMPANYPackaging Department
Budget Report (Flexible)For the Month Ended June 30, 2008
Difference
UnitsVariable costs
Direct materials ($.90 X 40,000)Direct labor ($1.00 X 40,000)Indirect materials ($.30 X 40,000)Indirect labor ($.25 X 40,000)Utilities ($.15 X 40,000)Maintenance ($.10 X 40,000)
Total variablecosts ($2.70 X 40,000)
Fixed costsRentSupervisionDepreciation
Total fixed costsTotal costs
Budget at40,000 Units
$ 36,000 40,000 12,000 10,000 6,000 4,000
108,000
8,000 7,000 5,000 20,000$128,000
Actual Costs40,000 Units
$ 37,600* 42,400 12,160 10,400 5,680 4,160
112,400
8,000 7,000 5,000
20,000$132,400
Favorable FUnfavorable U
$1,600 U 2,400 U 160 U 400 U 320 F 160 U
4,400 U
0 U 0 U 0 U 0 U$4,400 U
*Note that the actual variable costs in June was 20% less than the actualcosts in May. Therefore to find the actual costs in June, the actual variablecosts in May are multiplied by 80% as follows.
May(actual)
June(actual)
Direct materialsDirect laborIndirect materialsIndirect laborUtilitiesMaintenance
$ 47,000 X 80% 53,000 X 80% 15,200 X 80% 13,000 X 80% 7,100 X 80% 5,200 X 80%$140,500 X 80%
Responsibility ReportFor the Year Ended December 31, 2008
Difference
Budget ActualFavorable F
Unfavorable U
Sales
Variable costsCost of goods soldSelling and administrative
Total
Contribution margin
Controllable fixed costsCost of goods soldSelling and administrative
Total
Controllable margin
$2,400,000
1,200,000 240,000 1,440,000
960,000
200,000 60,000 260,000
$ 700,000
$2,310,000
1,240,000 232,000 1,472,000
838,000
192,000 66,000 258,000
$ 580,000
$ 90,000 U
40,000 U 8,000 F 32,000 U
122,000 U
8,000 F 6,000 U 2,000 F
$120,000 U
(b) The manager did not effectively control revenues and costs. Contributionmargin was $122,000 unfavorable and controllable margin was $120,000unfavorable. Contribution margin was unfavorable primarily becausesales were $90,000 under budget and variable cost of goods sold was$40,000 over budget. Apparently, the manager was unable to control vari-able cost of goods sold when sales failed to meet budget expectations.
The manager was effective in controlling fixed costs. However, the favor-able difference of $2,000 was only 1.6% of the unfavorable difference incontribution margin.
24-48
PROBLEM 24-4B (Continued)
(c) Two costs are excluded from the report: (1) noncontrollable fixed costsand (2) indirect fixed costs. The reason is that neither cost is controllableby the Home Appliance Division Manager.
Responsibility Performance ReportFor the Year Ended December 31, 2008
(in thousands of dollars)
Difference
Budget ActualFavorable F
Unfavorable U
SalesVariable costs
Cost of goods soldSelling and administrativeTotal
Contribution marginControllable fixed costs
Cost of goods soldSelling and administrative
TotalControllable margin
ROI
$2,950
1,320 350 1,670 1,280
270 130 400$ 880
17.6%(1)
$2,800
1,400 300 1,700 1,100
270 130 400$ 700
14%(2)
$150 U
80 U 50 F 30 U 180 U
0 U 0 U 0 U$180 U
3.6% U(3)
(1) $880$5,000
(2) $700
$5,000
(3) $180
$5,000
(b) The performance of the manager of the Lawnmower Division was belowbudget expectations for the year. The item that top management wouldlikely investigate first is the reason why sales were $150,000 belowbudget. Next, inquiry would be made as to the reason variable cost ofgoods sold is $80,000 unfavorable. Finally, the reasons for the favor-able variable selling and administrative expenses would be discussed.It is conceivable that an inadequate selling effort contributed to thelower sales.
(a) (1) The primary causes of the loss in net income were the decrease inthe number of boarding days and the decrease in the boardingfee. The number of boarding days decreased by 2,920 or approxi-mately 13% (2,920 days ÷ 21,900 days), and the boarding feedecreased from $25(a) per day to $20(b) per day, a decrease of 20%($5 ÷ $25). Together these resulted in a $167,900 decrease in salesrevenue, a decrease of approximately 31% ($167,900 ÷ $547,500).
(a)$547,500 ÷ 21,900 days = $25 per day(b)$379,600 ÷ 18,980 days = $20 per day
(2) Management did a poor job in controlling variable expenses. Giventhat boarding days declined by about 13%, variable expensesshould decline by about 13%, or more precisely, variable expenses
should decline by $25,842 $193,815 X 2,92021,900
. However, variable
expenses only declined by $14,335 or about 7% ($14,335 ÷ $193,815).Thus, management did a poor job in controlling variable expenses.Management did a better job in controlling fixed expenses. Fixedexpenses were under budget by $5,000 and this includes the addi-tional expenses incurred in advertising and entertainment.
(3) Management’s decisions to stay competitive probably were sound.Given the decline in boarding days, the decision not to replace theworker was sound. The decision to reduce rates was probablyforced by the competition. Without the additional advertising andentertainment expenses, the loss in net income might have beeneven greater.
24-52
BYP 24-1 (Continued)
(b) G-BAR PASTURESIncome Statement
Flexible Budget ReportFor the Year Ended December 31, 2008
Difference
Boarding days (BD)Sales ($25)Less variable expenses
$ 0 U 0 U 2,000 F 1,000 F 8,000 F 4,000 U 2,000 U 5,000 F$101,407 U
(c) (1) The primary causes of the decrease in net income are the decreasesin boarding rates and volume. The average daily rate chargedwas $20 = ($379,600 ÷ 18,980). This rate resulted in a decrease insales revenue of $94,900 or 20% = ($94,900 ÷ $474,500).
Given that it is “an extremely competitive business,” if G-Bar Pastureshad not reduced rates, boarding days almost certainly would havedeclined even more.
24-53
BYP 24-1 (Continued)
(2) Management did a poor job of controlling variable expenses.These expenses in total were $11,507 over budget or 7%, or($11,507 ÷ $167,973).
Moreover, each individual variable expense was over budget,except for supplies. Management did a good job of controllingfixed expenses as noted in part (a).
(3) As noted in part (a), management’s decisions to stay competitiveprobably were sound.
(d) Given that the industry is “extremely competitive,” management shouldconsider two options. One, become the lowest cost operator. If G-BarPastures is the company with the lowest operating costs, it can under-price its competitors and take customers away from them (increasingits sales). Eventually, some of its competitors (those with the highestoperating costs) will go out of business, and G-Bar Pastures will gettheir customers, or at least some of them. (Wal-Mart is an example ofthis strategy.)
Option two is to offer its customers a superior product or service. If cus-tomers perceive that G-Bar Pastures is the “best” boarding stable inKentucky, the company will take customers away from its competitors.Also, if G-Bar Pastures is perceived as the “best,” many customers will bewilling to pay a premium for its boarding service, and G-Bar Pastureswill be able to raise its rates. (Gillette is an example of this strategy.)
24-54
BYP 24-2 MANAGERIAL ANALYSIS
(a) Jane Duncan—Profit Center: Responsible for sales, inventory cost,advertising, sales personnel, printing, and travel. She is not responsiblefor the assets invested in her division and probably does not controlthe rent or depreciation costs either. As a profit center manager shemight have control of the insurance, but she probably does not.
Richard Wayne—Cost Center: Responsible for inventory cost, adver-tising, sales personnel, printing, and travel. As a cost center manager,he might or might not have control of rent and insurance costs, but heprobably does not. He does not have control of the assets invested inhis department; thus, he does not have control of the depreciation.
Jose Lopez—Investment Center: Responsible for all items shown.
(b) Jane Duncan Budget differences: The inventory cost is 30% ($45,000 ÷$150,000) above budget and so should definitely be brought to herattention. Travel is 25% ($5,000 ÷ $20,000) below budget. Students maydiffer as to whether they believe that this should be brought to herattention. The differences in rent and depreciation should not be broughtto her attention because she does not control those costs.
Richard Wayne Budget differences: The inventory cost, which is 20%($20,000 ÷ $100,000) above budget, should definitely be brought to hisattention. Travel costs are 33% ($10,000 ÷ $30,000) below budget. Thisshould probably be brought to his attention, so that he can make sure thatthe purpose that was to have been served by travel is being adequatelyserved by other means. The 67% ($20,000 ÷ $30,000) increase in rentand 10% ($10,000 ÷ $100,000) decrease in depreciation are not underhis control and so should not be brought to his attention. It shouldprobably be pointed out to students that all budget differences aremonitored by someone within the company. These differences that arenot the responsibility of the various managers are still within the scope oftop management’s responsibility.
Jose Lopez Budget differences: As manager of an investment center,Mr. Lopez is responsible for all categories of the budget. The selectionin this case would be which differences merit his attention. Any
24-55
BYP 24-2 (Continued)
decrease in a company’s gross profit rate (gross profit ÷ sales) is acause for concern. (Remember the gross profit is sales minus cost ofgoods sold.) Thus, the 5% increase in cost of goods sold should bebrought to his attention. Travel is below budget 25% ($500 ÷ $2,000),which is $500. This is not a large percentage of total costs, nor is it alarge dollar amount, so there could be an argument that this should be leftout. The 20% ($2,000 ÷ $10,000) increase in rent is only a $2,000 increase,so it could be included, though it might be left out as immaterial. The 50%($20,000 ÷ $40,000) increase in depreciation should definitely be included.
24-56
BYP 24-3 REAL-WORLD FOCUS
(a) The company’s costs do not increase proportionately with the revenuesincrease in the third and fourth quarter because the behavior of thecosts is primarily fixed.
(b) Static budgeting seems to be most appropriate for Computer Associatesbecause costs do not respond proportionately with changes in theactivity level (revenues).
(a) Mark Farris should be able to control all the variable expenses and thefixed expenses of supervision (but not his portion) and inspection.Insurance and depreciation ordinarily are not the responsibility of thedepartment manager.
(b) The total variable cost per unit is $26 ($52,000 ÷ 2,000). The total costduring the month to manufacture 1,500 units is variable costs $39,000(1,500 X $26) plus fixed costs ($36,000) or $75,000 ($39,000 + $36,000).
(c) EDMONDS COMPANYProduction Department
Manufacturing Overhead Budget Report (Flexible)For the Month Ended
(d) A production department is a cost center. Thus, the report should includeonly the costs that are controllable by the production manager. Thisreport is shown in Illustration 24-21. In this type of report, no distinctionis made between variable and fixed costs.
24-59
BYP 24-5 (Continued)
EDMONDS COMPANYProduction Department
Manufacturing Overhead Responsibility ReportFor the Month Ended
*$10,000 is deducted from both budget and actual for Mr. Farris’s cost.
To: Mr. Mark Farris, Production Manager
From: , Vice President of Production
Subject: Performance Evaluation for the Month of XXXXX
Your performance in controlling costs that are your responsibility wasvery disappointing in the month of XXXXX. As indicated in the accom-panying responsibility report, total costs were $13,500 over budget.On a percentage basis, costs were 28% over budget. As you can see,actual costs were over budget for every cost item. In two instances,costs were more significantly over budget (Indirect materials 34% andIndirect labor 50%).
24-60
BYP 24-5 (Continued)
Mark, it is imperative that you get costs under control in your departmentas soon as possible.
I think we need to talk about ways to implement more effective costcontrol measures. I would like to meet with you in my office at 9 a.m.on Wednesday to discuss possible alternatives.
24-61
BYP 24-6 ETHICS CASE
(a) The stakeholders in this ethical situation are:
� The employees and managers of each investment center.� The central management and chief executive officer.� The customers who buy the product.� The owners or stockholders.
(b) Pressure to perform is a frequently identified cause for unethicalconduct. Employees are more prone to engage in unethical conductwhen unreasonable demands are made upon them. Rather than losetheir jobs or be demoted, if given no alternatives, employees may seekto cut corners, reduce quality control, use questionable sales tactics,and bend the rules.
(c) The company might maintain open lines of communication with its em-ployees to better know the pressures of its managers. By “keeping intouch,” the company may avoid making unreasonable demands on itsmanagers and employees. The company might also develop a companycode of ethical conduct and enforce it. However, if dismissal or demotioncontinues to be the probable consequence of failure to meet objectives,some managers are likely to engage in unethical behavior in an attemptto meet the objectives.
24-62
BYP 24-7 ALL ABOUT YOU ACTIVITY
(a) The basic idea is to set up individual envelopes for different expensecategories. Once you have used up the money in a particular envelopeyou can’t use more. Begin by preparing a monthly budget. Identifythose items that you will pay in cash. These would include things likegroceries, eating out at restaurants, clothing, gasoline, car repairs, gifts,and entertainment. These are the categories for which you will haveenvelopes. Next, decide how often to fill the envelopes and determinethe amount to put in each envelope. If you continually run out ofmoney in a particular envelope you many need to re-evaluate yourallocation. If you don’t use up all the money in an envelope in onemonth you can carry it over to the next month.